Goldsmith comment: I'm on The Digest today, while Dan finishes up Extreme Value, which we'll publish tomorrow.
Take two minutes of your day and watch this video of Congressman Michael Capuano blasting the CEOs of Goldman, Morgan Stanley, Bank of America, Citi, and other banks. Congress grilled the bank heads yesterday over how they spent bailout money. You can view the video via Dealbreaker. (You can also read how our own Jeff Clark would have replied in today's Growth Stock Wire.)
While we'll probably never know where all the government money has gone, we know where Merrill Lynch spent some of its funds. In 2008, 700 Merrill employees made more than $1 million. Merrill paid out $3.6 billion in total bonuses... Meanwhile, the company lost $27 billion.
Warren Buffett put another $400 million to work... this time buying debt in gravel and crushed-stone manufacturer Vulcan Materials. Buffett's Berkshire bought $150 million of 10 1/8% notes due in 2015 and $250 million of 10 3/8% notes due in 2018.
Last September, we cited Ruane, Cunniff, and Goldfarb's research on Vulcan and its competitor Martin Marietta. In short, RCG said Vulcan and Martin face "no risk of technical obsolescence." The companies set market prices due to the difficulty of shipping rock, and they face little competition because it's so difficult to get permits to build a new rock quarry. Read the entire bullet here...
This kind of reasoning shows you can make great returns in the market using common sense... And you don't need an advanced mathematics degree to analyze stocks.
Netflix, the online DVD rental service, announced it signed up its 10 millionth subscriber last night. That means the company added roughly 600,000 subscribers in half a quarter. For comparison, it added 718,000 in all of the fourth quarter.
Netflix could be doing well for a few reasons. At $8.99 a month for unlimited rentals, it offers a good deal during the recession. The company also recently launched a streaming video-download service for owners of Microsoft's gaming console, the Xbox 360. The stock is still trading near its all-time high... much to the dismay of short-seller Jim Chanos...
I'm not sure if he's still short – hedge-fund managers don't have to disclose short positions to the SEC – but Chanos laid out his short thesis on the stock last year: "Look at Netflix. Consider the concept of having little old ladies in warehouses stuffing envelopes with DVDs. That might be a business for two or three years, but then it won't work."
The New York Times reports 100 banking regulators are busy poring over Citi's books, performing a "stress test" to gauge the company's financial health. Treasury Secretary Tim Geithner plans to carry out these stress tests on every large U.S. bank to better judge how to dole out government funds. But is 100 enough folks to analyze a financial giant like Citi? Yves Smith at Naked Capitalism doesn't think so: "In the early 1990s, when Citi almost went under, it had 160 bank examiners working SOLELY on its commercial real estate portfolio."
I wonder what's harder to analyze... a portfolio of commercial real estate properties or a portfolio filled with hundreds of billions of dollars of mortgage-backed securities and credit-default swaps?
At least Geithner is doing a better job than the credit-ratings agencies... According to David Einhorn of hedge fund Greenlight Capital, these companies assign only three of four people to cover the entire investment banking industry.
New highs: none.
Don't miss an explanation of the gold/silver ratio and which metal we expect to rally, below. How many of you are sitting on precious metals? Let us know... feedback@stansberryresearch.com.
"I have seen so many different claims as to what the gold/silver ratio should be that I do not know what to believe. I would appreciate a Stansberry ruling because I feel I could trust it." – Paid-up subscriber Derek Durling
Goldsmith comment: It's tough to peg an exact number on the gold/silver ratio, but it has historically been around 16. Now the ratio is around 70. So for that number to normalize, either gold needs to fall or silver needs rise... a lot.
With all of the bullish hype surrounding gold, my money is on the latter. With gold sitting at $1,000 an ounce, silver would have to hit $62 an ounce for the ratio to revert to 16... That's a nearly 400% gain from today's prices. The only problem is it could take awhile for silver to start its huge rally. And your money is sitting idle.
Leave it to our expert trader Jeff Clark to solve that problem. He found a way to own silver and get paid huge dividends. He calls it turning "your precious metals into ATMs." Advanced Income subscribers can review the February 2009 issue for more information. If you'd like to learn more about Advanced Income and gain access to Jeff's latest silver trade, click here...
"Quiet, please! If you keep touting the virtual banks, the share price will rise and I will eventually lose the ability to reinvest the dividends and compound by investment dollars at a rate of 15-20% a year! I don't have to tell YOU what effect that has on one's portfolio and as long as the share price stays where it is and the dividends keep comi
ng, I certainly have no desire to see anything change related to this investment.
"Thank you for both of the deals you pointed out. If you noticed, shortly after you recommended your most recent pick in this arena, the share price of your former favorite took a short-term plunge and the yield on it shot up to almost 20% also. It is, however, a very boring way to make money. I guess we just have to take the good with the better in this case." – Paid-up subscriber Ken McGaha
Goldsmith comment: Sorry for the inconvenience, Ken. But we're here to pass on great investment ideas to our subscribers.
Regards,
Sean Goldsmith
Baltimore, Maryland
February 12, 2009